Randomness as seen by Nassim Taleb

“Probability is not about the odds, but about the belief in the existence of an alternative outcome, cause, or motive”

Disappointed by Ayn Rand’s overfitting of consequences onto causes, I moved on to the book I’ve been meaning to read for a long time: Fooled by Randomness by N.N. Taleb.

What is Fooled by Randomness about?

Taleb is pretty clear on that:

“This book is about luck disguised and perceived as non-luck (that is, skills) and, more generally, randomness disguised and perceived as non-randomness (that is, determinism)”

This has to be one of my favourite paragraphs in modern non-fiction:

“It [determinism] manifests itself in the shape of the lucky fool, defined as a person who benefited from a disproportionate share of luck but attributes his success to some other, generally very precise, reason.”

Rand would argue that that’s intellect and taking responsibility. Instagram tells you it’s positive thinking. Richard Branson would tell you that it’s looking after your people and taking risk – though I’ve never had the “pleasure” of properly familiarising myself with his wisdom. Ryan Holiday would argue that it is one’s ego that gets in the way.

Life is more random than we care to admit

“... Just as one day some primitive tribesman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president “at the helm”. Bookstores are full of biographies of successful men and women presenting their specific explanation on how they made it big in life (we have an expression, “the right time and the right place” to weaken whatever conclusion can be inferred from them).”

“Symbolism is the child of our inability and unwillingness to accept randomness; we give meaning to all manner of shapes; we detect human figures in inkblots.”

I find this very funny as I am the author of “Cliff notes” on Ireland’s secondary school poetry course. I enjoy looking for patterns where there are possibly none. My job as a doctor is right about the same: fit symptom A with symptom B and develop a list of differentials. While endless creativity is helpful with the Cliff notes, the situation with diagnoses is quite different. Taleb would argue that the conclusions I come to are more of a reflection on me than the material I am reflecting on.

“European intellectual life developed what seems to be an irreversible taste for symbolism – we are still paying its price, with psychoanalysis and other fads.”

If there is one cause for this confusion between the left and the right sides of our table, it is our inability to think critically – we may enjoy presenting conjectures as truth.

“We are flawed beyond repair – at least for this environment.”

But it is only bad news for those utopians who believe in an idealised human kind.

He describes utopians (Rousseau, Godwin, Payne) as people who believe that knowing what is good for us will lead to that choice. So for example, telling people that obesity leads to health risks would lead people to lose weight according to this group.

On the other hand, he regards the likes of Popper, Hayek, Friedman, Adam Smith, Tversky and Kahneman, Soros, etc as people who see the world as it is and subscribe to scientific fallibilism.

Taleb advocates going around emotion rather than rationalising them:

“Ridding ourselves of our humanity is not in the works; we need tricks, not some grandiose moralizing help”

Taleb on happiness

Taleb calls upon Plutarch’s Lives:

“The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments, or to admire a man’s happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with all variety of future; and him only to whom the divinity yet to come, with all variety of future; and him only to whom the divinity”

The modern equivalent has been no less eloquently voiced by the baseball coach Yogi Berra, who seems to have translated Solon’s outburst from the pure Attic Greek into no less pure Brooklyn English with “it ain’t over until it’s over”, or, in a less dignified manner, with “it ain’t over until the fat lady sings”.

Taleb, not unlike Rand, believes in thinking hard, but reminds us to not take our own conclusions too seriously:

“Trading forces someone to think hard; those who merely work hard generally lose their focus and intellectual energy. In addition, they end up drowning in randomness. Work ethics draws people to focus on noise rather than the signal.”

I was very comforted to read the following on clarity vs correctness from Taleb. He spends this entire book fighting against the temptation to oversimplify and overexplain”

“Beware the confusion between correctness and intelligibility. Part of conventional wisdom favours things that can be explained rather instantly and “in a nutshell” – in many circles it is considered law. Having attended a French elementary school, a lycee primaire, I was trained to rehash the popular adage: Ce qui se congoit bien s’enonce clairement Et les mots pour le dire viennent aisement (What is easy to conceive is clear to express/Words to say it would come effortlessly)… Borrowed wisdom can be vicious. I need to make a huge effort not to be swayed by well-sounding remarks. I remind myself of Einstein’s remark that common sense is nothing but a collection of misconceptions acquired by age 18. Furthermore: what sounds intelligent in a conversation or a meeting, or, particularly in the media, is suspicious.”

He gives many examples of things that were genuinely new and good, but rejected when they originally were presented. This supports the whole “makes sense instantly” notion:

“Any reading of the history of science would show that almost all the smart things that have been proven by science appeared like lunacies at the time they were first discovered.”

Having worked with startups, I’ve always been told that one should be able to explain what your company does in one sentence. I just want to remark that this is for the “benefit” of investors alone.

Not everything is worth trying to explain

“I have a trick to know if something real in the world is taking place… The trick is to look only at the large percentage changes. Unless something moves by more than its usual daily percentage change, the event is deemed to be noise. Percentage moves are the size of the headlines. In addition, the interpretation is not linear; a 2% move is not twice as significant an event as 1%, it is rather like four times. The headline of the Dow moving by 1.3 points on my screen today has less than one millionth of the significance of the serious 7% drop of October 1997… We cannot instinctively understand the nonlinear aspect of probability.”

Confidence intervals are more important than the estimate

This point is related to the importance of variance as well as averages:

“Professionals forget the following reality. It is not the estimate or the forecast that matters so much as the degree of confidence with the opinion. Consider that you are going on a trip one fall morning and need to formulate an idea about the weather conditions prior to packing your luggage. If you expect the temperature to be 60 degrees, plus or minus 10 degrees (say in Arizona), then you would take no snow clothes and no portable electric fan. Now what if you were going to Chicago, where you are told that the weather, while being 60 degrees, will nevertheless vary by about 30 degrees? You would have to pack winter and summer clothes. Here the expectation of the temperature carries little importance concerning the choice of clothing; it is the variance that matters. Your decision to pack is markedly different now that you are told that the variability would be around 30 degrees. Now let us push the point further; what if you were going to a planet where the expectation is also going to be around 60 degrees, but plus or minus 500 degrees? What would you pack?”

Consistency as path dependence

Taleb argues against the compulsion to keep our opinions the same and expect the same of others. From a logical stand points he is completely right. From a psychological one – we suffer greatly when we have to deviate from consistency and we simply don’t trust people who change their opinions. He gives the example of G. Soros, a man her described as “complicated”. He attributes at least some of Soros’ success to this ability to not be married to his views:

“They are totally free from their past actions. Every day is a clean slate.”

Taleb goes on to explain that we have evolved this for obvious reasons:

“Think about the consequences of being a good trader outside of the market activity, and deciding every morning at 8 a.m. whether to keep the spouse or if it is not better to part with him or her for a better emotional investment elsewhere.”

Stoicism as seen by Nassim Taleb

“It is the attempt by man to get even with probability.”

I think that’s a very curious interpretation! A slightly escapist one, but interesting all the same.

“The only article Lady Fortuna has no control over is your behaviour.”

We probably cannot overcome our biases

The epiphany I had in my career in randomness came when I understood that I was not intelligent enough, nor strong enough, to even try to fight my emotions. Besides, I believe that I need my emotions to formulate my ideas and get the energy to execute them.

The good news is that there are tricks.

Avoid eye contact to avoid an emotional response

Psychopathy central, I know. But sometimes, it’s better to prevent motional contagion, for example, in a road rage situation:

One such trick is to avoid eye contact (through the rear-view mirror) with other persons in such encounters as traffic situations.

Don’t listen to people who aren’t definitely worth listening to

Taleb argues that it is best to not engage in reading comments and reviews from people who don’t have a lot of credibility as their comments are more about them then they are about the work supposedly being reviewed. My personal experience certainly agrees with this. This is one of the most important lessons of the book. It’s also a very good thing to remember when asking advice (or, God forbid, getting unsolicited advice). This point subtly arises from the confidence interval point mentioned above.

Manage your exposure to things that have a strong emotional impact on you

Yet I have experienced leaps of joy over results that I knew were mere noise, and bouts of unhappiness over results that did not carry the slightest degree of statistical significance. I cannot help it, but I am emotional and derive most of my energy from my emotions. So the solution does not reside in taming my heart. Since my heart does not seem to agree with my brain, I need to take serious action to avoid making irrational trading decisions, namely, by denying myself access to my performance report unless it hits a predetermined threshold. 

This certainly resonates with me. As I mentioned, I have an online venture. Whenever a sale happens, I get an email about it. In the early days, I used to get so excited when someone made a purchase – it was great! Then I found that if I opened my emails, but the inbox did not contain any such notifications, I would feel a bit disappointed. Furthermore, if a sale was made, I didn’t feel compelled to work quite as hard! If it wasn’t – I was there thinking outside the box of what I could do better. I quickly learnt to only check that email account once a day.

One of the most irritating conversations I’ve had is with people who lecture me on how I should behave. Most of us know pretty much how we should behave. It is the execution that is the problem, not the absence of knowledge.

And the bit that is lacking from most awareness campaigns.

I am tired of the moralising slow-thinkers who pound me with platitudes like I should floss daily, eat my regular apple and visit the gym outside of the new-year resolution… We need tricks to get us there but before that we need to accept the fact that we are mere animals in need of lower forms of tricks, not lectures.

I am not sure I agree. I am quite allergic to these tricks because quite often just like the lecturing, they do not work. However, unlike the lectures, they are held to a lower standard of evidence.

We are not designed for schedules

Our ancestors didn’t work to deadlines. In the second edition of the book, Taleb goes on about how we are designed for randomness: we are more like firemen meditating between calls. Optimising everything may be a very poor decision that will take away the very things that we are trying to achieve – as far as the big picture is concerned.

We favour the visible, tangible and narrated – and scorn the abstract. Maybe I should turn to writing fiction?